Inflation targeting and financial market volatility
We construct an inflation-targeting index for a group of seven Organization for Economic Co-operation and Development (OECD) countries that ranks countries according to the key features of formal inflation targeting regimes. The relationship between this index and bond markets is empirically examined to investigate whether inflation targeting reduces the mean of the conditional volatility of the difference between actual yields and those predicted by the expectations hypothesis. We find that the adoption of a more stringent inflation-targeting regime is generally associated with a statistically significant drop in conditional volatility, suggesting that inflation targeting reduces noise in bond markets.
Volume (Year): 22 (2012)
Issue (Month): 9 (May)
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